CRM D2 sec 3+4: 1/16/25 at 11:28AM

Introduction to Total Cost of Risk (TCoR)

  • Understanding the Total Cost of Risk concept is essential for effective risk management.

  • It's important to consider all potential costs associated with risk in an organization.

Real-life Examples of Construction Delays

  • Contractors often provide vague timelines (e.g., "you'll be in by Thanksgiving") which can lead to misunderstandings.

  • This ambiguity can significantly impact other financial and emotional aspects, such as the cost of temporary housing when the expected move-in date is delayed.

  • Delays lead to lack of enjoyment from the new home and can incur additional costs like storing belongings or hotel fees.

Cost of Risk Components

Hard Costs

  • Insurance Premiums: Regular payments made to insurance companies.

  • Deductibles: Amounts paid out-of-pocket before insurance coverage kicks in.

  • Self-Insured Retentions: Amounts that a business retains as part of its insurance policy.

Intangible Costs

  • Lost Enjoyment: Time lost enjoying a new home due to delays.

  • Impacts on Life: Emotional and logistical issues from not being able to move in as scheduled.

Employee-Related Costs

  • Accidents on Job: Example of a hand injury leading to increased labor costs due to overtime and hiring temporary staff.

  • Costs of Retaining Employees: Extended hiring processes or further training programs to address safety issues post-incident.

Evaluation of Cost of Risk

Insurance-Related Costs

  • Brokers Fees: Payments made to insurance brokers, which can be substantial and should be included in TCoR evaluations.

  • Loss Prevention Costs: Money spent on safety programs and training to prevent future accidents.

Systems Involved in Risk Management

  • Risk Management Information Systems (RMIS) play a crucial role in assessing and managing TCoR by tracking all incurred costs.

Key Elements in Building a Total Cost of Risk Model

Identify and Document Costs

  • All cost aspects should be collected, including both direct and indirect costs associated with risk management.

  • Verification of data is crucial to ensure all costs are accounted for in modeling.

Stakeholder Engagement

  • Involve senior management, finance, legal, and HR in discussions about TCoR for better allocation understanding.

  • Transparency at higher levels can help mitigate pushback from locations that may feel unfairly burdened by allocations.

Methodologies for Allocating Costs

Different Allocation Methods

  1. Exposure-Based Allocation: Uses metrics such as number of employees, sales volume, or square footage to distribute costs.

    • Pros: Simple and straightforward; easy to handle.

    • Cons: Doesn’t account for performance indicators like safety records.

  2. Experience-Based Allocation: Allocates costs based on the frequency and severity of past claims.

    • Pros: Encourages safety and good behavior; aligns costs with actual risk.

    • Cons: Can lead to unexpected heavy burdens on certain locations due to unfortunate past claims.

  3. Combination Method: A mix of both exposure and experience bases aiming to balance fairness with accountability.

    • Best for equitable and fair allocation across diverse locations.

Implementation Steps for TCoR Model

  • Step 1: Determine desired results of the total cost of risk assessment (e.g., lowering overall costs).

  • Step 2: Identify the costs that will be included in the model (e.g., insurance, retained losses).

  • Step 3: Establish how these costs will be allocated (exposure, experience, or a combination).

  • Step 4: Test and adjust the allocation model as necessary before final implementation to ensure it is accurate and fair.

Conclusion

  • TCoR models should be dynamic and revisited regularly to incorporate changes in risk exposure and organizational goals.

  • Continuous risk education within the organization helps in building a strong risk management culture.